Why Have Food Commodity Prices Risen Again

Between early June 2010 and February 2011, prices of food commodities increased sharply, surpassing the 2008 peaks that had spread anxiety among policymakers and low-income consumers around the world. Most of the long-term trends in agricultural production and consumption that contributed to the 2002-06 price increases and the 2007-08 price spike also contributed to the recent price surge. This report describes the factors that have contributed to the large and rapid increase in agricultural prices during the past year. It focuses particularly on food commodity prices¿which have risen 60 percent since June 2010. Charts and tables. This is a print on demand edition of an important, hard-to-find publication.

Sharp increases and declines in agricultural commodities are not uncommon, with fi ve such periods over the past 40 years. Since June 2010, prices of food commodities (grains, oilseeds, vegetable oils, meat, seafood, sugar, and fruit) have risen sharply again. This increase is reminiscent of the 2007-08 price spike that spread anxiety among policymakers and low-income consumers around the world, particularly in developing countries dependent on imported food commodities.

The U.S. food system provides many benefits, not the least of which is a safe, nutritious and consistent food supply. However, the same system also creates significant environmental, public health, and other costs that generally are not recognized and not accounted for in the retail price of food. These include greenhouse gas (GHG) emissions, soil erosion, air pollution, and their environmental consequences, the transfer of antibiotic resistance from food animals to human, and other human health outcomes, including foodborne illnesses and chronic disease. Some external costs which are also known as externalities are accounted for in ways that do not involve increasing the price of food. But many are not. They are borne involuntarily by society at large. A better understanding of external costs would help decision makers at all stages of the life cycle to expand the benefits of the U.S. food system even further. The Institute of Medicine (IOM) and the National Research Council (NRC) with support from the U.S. Centers for Disease Control and Prevention (CDC) convened a public workshop on April 23-23, 2012, to explore the external costs of food, methodologies for quantifying those costs, and the limitations of the methodologies. The workshop was intended to be an information-gathering activity only. Given the complexity of the issues and the broad areas of expertise involved, workshop presentations and discussions represent only a small portion of the current knowledge and are by no means comprehensive. The focus was on the environmental and health impacts of food, using externalities as a basis for discussion and animal products as a case study. The intention was not to quantify costs or benefits, but rather to lay the groundwork for doing so. A major goal of the workshop was to identify information sources and methodologies required to recognize and estimate the costs and benefits of environmental and public health consequences associated with the U.S. food system. It was anticipated that the workshop would provide the basis for a follow-up consensus study of the subject and that a central task of the consensus study will be to develop a framework for a full-scale accounting of the environmental and public health effects for all food products of the U.S. food system. Exploring Health and Environmental Costs of Food: Workshop Summary provides the basis for a follow-up planning discussion involving members of the IOM Food and Nutrition Board and the NRC Board on Agriculture and Natural Resources and others to develop the scope and areas of expertise needed for a larger-scale, consensus study of the subject.

From 2006 to mid-2008 the international prices of agricultural commodities increased considerably, by a factor larger than two. This upward trend in agricultural prices captured the world's attention as a new food crisis was emerging. Several explanations for these movements in prices, ranging from demand-driven forces to supply shocks, have been provided by analysts, researchers, and development institutions. This paper is an attempt to empirically validate these explanations using time series econometrics and data at monthly frequency. We focus on the international price of corn, wheat, rice, and soybeans. First, we identify variables associated with the factors mentioned as causing the increase in these agricultural commodities prices. Second, we use time series analysis to try to quantitatively validate those explanations. The empirical work presented here includes first difference models and rolling Granger causality tests. Overall, our empirical analysis mainly provides evidence that financial activity in futures markets and proxies for speculation can help explain the observed change in food prices; any other explanation is not well supported by our time series analysis.

Concerns about energy security, uncertainty about oil prices, declining oil reserves, and global climate change are fueling a shift towards bioenergy as a renewable alternative to fossil fuels. Public policies and private investments around the globe are aiming to increase local capacity to produce biofuels. A key constraint to the expansion of biofuel production is the limited amount of land available to meet the needs for fuel, feed, and food in the coming decades. Large-scale biofuel production raises concerns about food versus fuel tradeoffs, about demands for natural resources such as water, and about potential impacts on environmental quality. The book is organized into five parts. The introductory part provides a context for the emerging economic and policy challenges related to bioenergy and the motivations for biofuels as an energy source. The second part of the handbook includes chapters that examine the implications of expanded production of first generation biofuels for the allocation of land between food and fuel and for food/feed prices and trade in biofuels as well as the potential for technology improvements to mitigate the food vs. fuel competition for land. Chapters in the third part examine the infrastructural and logistical challenges posed by large scale biofuel production and the factors that will influence the location of biorefineries and the mix of feedstocks they use. The fourth part includes chapters that examine the environmental implications of biofuels, their implications for the design of policies and the unintended environmental consequences of existing biofuel policies. The final part presents economic analysis of the market, social welfare, and distributional effects of biofuel policies.

The macroeconomic effects of large food price swings can be broad and far-reaching, including the balance of payments of importers and exporters, budgets, inflation, and poverty. For market participants and policymakers, managing low frequency volatility—i.e., the component of volatility that persists for longer than one harvest year—may be more challenging as uncertainty regarding its persistence is likely to be higher. This paper measures the low frequency volatility of food commodity spot prices using the spline- GARCH approach. It finds that low frequency volatility is positively correlated across different commodities, suggesting an important role for common factors. It also identifies a number of determinants of low frequency volatility, two of which—the variation in U.S. inflation and the U.S. dollar exchange rate—explain a relatively large part of the rise in volatility since the mid-1990s.

Using economic models and empirical analysis, this volume examines a wide range of agricultural and biofuel policy issues and their effects on American agricultural and related agrarian insurance markets. Beginning with a look at the distribution of funds by insurance programs—created to support farmers but often benefiting crop processors instead—the book then examines the demand for biofuel and the effects of biofuel policies on agricultural price uncertainty. Also discussed are genetically engineered crops, which are assuming an increasingly important role in arbitrating tensions between energy production, environmental protection, and the global food supply. Other contributions discuss the major effects of genetic engineering on worldwide food markets. By addressing some of the most challenging topics at the intersection of agriculture and biotechnology, this volume informs crucial debates.

This book provides fresh insights into concepts, methods and new research findings on the causes of excessive food price volatility. It also discusses the implications for food security and policy responses to mitigate excessive volatility. The approaches applied by the contributors range from on-the-ground surveys, to panel econometrics and innovative high-frequency time series analysis as well as computational economics methods. It offers policy analysts and decision-makers guidance on dealing with extreme volatility.

U.S. food prices never seem to decline. Higher farm commodity prices and energy costs are the leading factors behind higher food prices. Farm commodity prices have surged because (1) demand for corn for ethanol is competing with food and feed for acreage; (2) global food grain and oilseed supplies are low due to poor harvests; (3) the weak dollar has increased U.S. exports; (4) rising incomes in large, rapidly emerging economies have changed eating habits; and (5) input costs have increased. Higher energy costs increase transportation, processing, and retail costs. Although the cost of commodities such as corn or wheat are a small part of the final retail price of most food products, they have risen enough to have an impact on retail prices. Generally, price changes at the farm level have a diminished impact on retail prices, especially for highly processed products. The impact of higher food prices on U.S. households varies according to income. Lower-income households spend a greater portion of their income on food and feel price hikes more acutely than high-income families. Higher food costs impact domestic food assistance efforts in numerous ways depending on whether benefits are indexed, enrolments are limited, or additional funds are made available. Higher food and transportation costs also reduce the impact of U.S. contributions of food aid under current budget constraints.